Commentary on Economics, Information and Human Action

Baseload electric generating capacity is exciting…

Baseload electric generating capacity is exciting… wait, no … baseload capacity is exiting areas served by regional wholesale power markets, and the owners of these assets and some state policymakers are anxious to solve what they imagine to be a problem.

The Utility Dive story highlights efforts in Ohio, New York, and other states to offer “around market” subsidies to utility generators poised to retire, and the pushback from independent power producers and the Federal Energy Regulatory Commission in defense of competitive wholesale markets. State policymakers are coming down on both sides of the issue, some favoring utilities and others not convinced ratepayers should be put on the hook to protect profits at specific power plants. Some utility interests claim the trouble is reason to extinguish competition at both wholesale and retail levels and return to a fully regulated system.

Some excerpts from the Utility Dive article:

The widespread retirement of baseload generation presents a number of challenges, from the loss of carbon-free nuclear plants to potential generation shortfalls. And while motivations vary, Gifford says the spread of state efforts to stem the tide of retirements shows that many policymakers are increasingly dissatisfied with the design of organized markets across the nation.

Without concerted action to alter market constructs, Gifford is concerned some states will turn back to a vertically-integrated utility model — putting the entire organized market experiment at risk.

“When you have plausible and it seems to me serious talk in Ohio about reintegration, that puts these markets in crisis,” he told Utility Dive. “It seems to me markets are generally in much more crisis than anybody thinks right now.”

Widespread problems.

In PJM, MISO, ERCOT, NYISO and ISO-NE, aging coal and nuclear plants have been unable to recover their fixed costs and are increasingly going offline as a result. The retirements have been occurring at such a “disquieting frequency” that a full inventory is infeasible, the authors write, but recent figures back up the trend.

All told, more than 50 GW of coal generation are scheduled to retire between 2012 and 2020, according to SNL, while nuclear plants in Illinois, New York, California, Massachusetts and elsewhere are the subject of high-profile discussions over potential retirement and replacement capacity.

A number of factors contribute to the trend, including low gas prices and an influx of cheap renewable energy that can sometimes push power prices into negative territory, Gifford and Larson wrote. But the former Colorado PUC chair believes there’s a deeper issue at play as well.

“The problem with these markets — and maybe it’s not a problem, but a feature — is they clear at the marginal cost of production,” he said. “Well, at the marginal cost of production, you’re not covering your fixed costs.”

In theory, capacity market payments should help generators cover those fixed costs and keep capacity online. But low demand growth and cheap gas have kept capacity prices down in markets like PJM and ISO-NE, and some regions like ERCOT lack capacity markets altogether.

Dominos?

“I think the reintegration question is, who’s going to go first?” Larson said. “[Ohio] went first on the around market piece, so it kind of makes sense that they would be at that question first.”

Both he and Gifford fear a domino effect — that if one state re-regulates, others will follow, potentially unraveling entire organized market constructs. In the face of such widespread dissatisfaction with the markets, Gifford said the onus is on FERC and other federal policymakers to devise comprehensive fixes.

“If they want to preserve their market structure, they need to start coming up with answers for what states perceive as real policy deficiencies in these markets,” Gifford said. “I don’t mean to cast dispersions on FERC, and I’m not sure what they’d do, but their market experiment is in jeopardy, and the states, which still have a lot of power, some of them look poised to reject it.”

But if the need for a solution is clear, the details of one are less so.(SoOf course “the need for a solution” is not clear, in part because the problem is not well specified. If the problem is low cost electric power arising from cheap natural gas and efficient new generating capacity, that is a problem consumers do not want regulators to solve.

The real problem may be that owners of failing investments think they can use state regulations to reach into ratepayer pocketbooks for some extra cash.

At its core, Gifford said the problems with organized markets today can all be traced back to the fact that we “can’t resist the temptation to screw with the price system.” More than in other industries, policymakers and the public have a vested interest in the outcomes of organized electricity markets — whether related to power reliability, climate change or other externalities.

“We want markets, but we want to preordain the outcomes of these markets, and that’s not what a market is about,” Gifford said.

Baseload electric power capacity is exciting … if you happen to be a regulatory economics geek interested in the electric power industry. Questions, puzzles, and challenges abound.

Now is the time for all good economists to come to the aid of peaceful cooperation through markets.